Home sales bounce back, 3rd-quarter GDP raised

Sales of previously owned homes rose in November, offering the latest sign the economy was ending the year on a more solid footing after a sluggish third-quarter.

The Commerce Department on Wednesday said the economy grew at an annual rate of 2.6 percent in the third quarter, a touch above its earlier 2.5 percent estimate, but more of that output ended up in warehouses.

In a separate report, the National Association of Realtors said existing home sales rose 5.6 percent in November to a 4.68 million unit annual pace. Sales were the highest since June but were still at a depressed level and came in slightly weaker than expected.

Economists, who had expected GDP growth to be revised to a 2.8 percent rate, were little fazed and drew comfort from a range of other recent data from retail sales to trade that indicated activity has accelerated in the past few months.

Many forecasters expect gross domestic product to expand at a 3 percent to 3.5 percent pace in the fourth quarter.

We expect more economic momentum here at year end carrying over into 2011; obviously housing remains impaired, said Robert Dye, senior economist at PNC Financial Services in Pittsburgh.

Stocks on Wall Street rose, and the benchmark Standard & Poor's 500 index closed at its highest level since the collapse of Lehman Brothers in September 2008. Prices for U.S. government debt dipped, while the dollar edged lower against a basket of currencies.

TAX PLAN TO SUPPORT GROWTH

The economy, which expanded at an anemic 1.7 percent rate in the second quarter, is expected to receive support next year from an $858 billion tax cut deal that led forecasters to raise 2011 growth estimates by as much as a percentage point.

The tax plan is seen complementing the Federal Reserve's program to buy $600 billion worth of government bonds to keep borrowing costs tamped down and shore up the recovery.

A key question hanging over the economy is whether the level of inventories held by businesses is appropriate given the pace of sales.

Business inventories increased $121.4 billion in the third quarter, revised from the $111.5 billion estimated previously. Without the inventory buildup, the economy expanded at a 0.9 percent pace.

Although the stockpiling implies some softness in the pace of growth in the fourth quarter, some businesses may be happy to add further to inventories given signs of strong sales in October and November.

The government revised down the third-quarter increase in consumer spending to a 2.4 percent rate from 2.8 percent, but all indications are that spending has since picked up.

Retailer Bed Bath & Beyond reported quarterly results after the market close and gave a strong outlook for the period covering the holidays that underscored signs of strength in consumer spending. Sales rose 11.1 percent in the fiscal third quarter ended November 27 and earnings topped Wall Street expectations, sending the shares up 6 percent in after-hours trade.

Consumer spending accounts for more than two-thirds of U.S. economic activity and the third-quarter pace was the fastest since the first three months of 2007.

Consumer confidence has ticked up, retail sales have been solid and auto sales have improved. Consumers are feeling more comfortable with keeping pace with the overall economy, not leading the economy, said PNC's Dye.

HOUSING WEAK, INFLATION LOW

There were also slight downward revisions to government and business spending estimates, while the trade deficit was a bit smaller than previously estimated and the contraction in home building was little changed.

Housing remains the economy's main weak spot.

The Mortgage Bankers Association reported that mortgage applications last week fell to their lowest level in nearly a year as interest rates ticked higher.

We are still in an environment of sluggish demand for housing, said Michelle Meyer, a U.S. economist at Bank of America Merrill Lynch, in New York. The recent increase in mortgage rates should weigh on affordability. However, that should be countered somewhat by an improving economic backdrop,

In the Commerce Department's GDP report, after-tax corporate profits were revised down to show a 0.2 percent rise, instead of a 1 percent rise. It was the weakest reading since the fourth quarter of 2008 and marked a sharp slowdown from the 3.9 percent gain in the April-June period.

The report also showed a lack of inflation pressure. The Fed's preferred inflation measure, the personal consumption expenditures price index, excluding food and energy, rose at a revised annual rate of 0.5 percent. That was the smallest increase since records began in 1959.

(Additional reporting by Corbett Daly in Washington and Julie Haviv and Dhanya Skariachan in New York; Editing by Neil Stempleman and Leslie Adler)